Exercise 1. Lessee (Finance Lease) and Lessor (Sales-Type Lease):

On 1/1, Year 7, a lessee agrees to Finance Lease and the lessor to a Sales-Type Lease. The lease is for 5 years. The annual lease payments are $20,000 payable on 1/1 of each year of the lease. There is $5,000 option to purchase the lessee is reasonably certain to exercise. The interest rate implicit in the lease, which the lessee is aware of is 9%, thus a present value factor of an annuity due of 4.2397 and the present value of a single sum 0.6499.

The fair market value and cash selling price of the equipment is $88,044, which is also the present value of the minimum lease payments for the lessee and the net investment for the lessor. The inventory carrying value of the equipment on the lessors books is $70,000. Complete the depreciation (amortization of asset cost) journal entry on the lessees books assuming straight-line depreciation recorded at 12/31 each year:

AMORTIZATION EX. LEASES	$
ACCUMULATED AMORTIZATION - LEASE		$

Prepare the amortization table shown below for the first three years of the lease and the journal entries for the lessee and lessor on the following pages for the dates indicated. Round to the nearest whole dollar.

Date	Lease payment	Interest Expense (lessee) or Interest Revenue (lessor)	Amortization	Carrying value of lease obligation and net investment
1/1/Yr 7				$
1/1/Yr 7	$		$	$
12/31/Yr 7		($_________ X ___ = ) $________
1/1/Yr 8	$		$	$
12/31/Yr 8		($_________ X ___ = ) $________
1/1/Yr 9	$		$	$39,043

On the next page prepare the journal entries for the dates indicated. The following accounts are used for each party.

For Lessee:

CASH INTEREST EXPENSE RIGHT-OF-USE ASSET LEASE LIABILITY

For Lessor:

CASH COST OF GOODS SOLD INTEREST REVENUE EQUIPMENT or INVENTORY

LEASE RECEIVABLE SALES

Lessee Journal Entries Finance Lease:

1. Prepare the journal entries on 1/1, Year 7.

2. Prepare the journal entry on 12/31, Year 7.

3. Prepare the journal entry on 1/1, Year 8.

4. Prepare the journal entry on 12/31, Year 8.

5. Prepare the journal entry on 1/1, Year 9.

LEASE LIABILITY	20,000
CASH		20,000